NEW YORK — The stock market notched its best gain in 3 1/2 months Wednesday as a second straight day of falling oil prices led Wall Street to shake off troubling new data on inflation.
The Dow Jones industrial average soared nearly 300 points, with investors piling back into many of the financial stocks they had shunned in recent days.
The pullback in oil raised hope that the upward pressure on food, gasoline and other consumer prices would moderate in coming weeks and provide much-needed relief to the economy -- and American consumers.
"The biggest driver is we had two down days in a row in energy prices," said Art Hogan, chief market strategist at Jefferies & Co. "To get a pullback in energy prices, and a significant pullback, is really positive."
Two days after suffering one of their worst-ever declines, financial stocks surged in part on unexpectedly strong results and a surprise dividend increase from Wells Fargo & Co., the biggest banking company on the West Coast. Wells Fargo shares rose by 33%.
A closely watched bank-stock index leaped 17%, with the shares of major banking companies bounding with the vigor of Internet highfliers during the technology-stock boom. Bank of America jumped 22%, Citigroup was up 13% and beleaguered Washington Mutual bounced 25%.
However, analysts cautioned that the rally could be short-lived.
"The concern is if it's just a one-day wonder," said Steven Goldman, chief market strategist at Weedon & Co.
Government figures released Wednesday still point to a grim economy, starting with inflation.
Fueled by higher gasoline prices, the cost of consumer goods barreled ahead in the last 12 months at their fastest pace in 17 years, the Labor Department said Wednesday.
Year-over-year prices were up 5%, or twice the level the Federal Reserve prefers. They rose a higher-than-expected 1.1% in June, the sharpest monthly increase since Hurricane Katrina in 2005.
The core inflation rate, which excludes volatile food and energy prices, popped up 0.3%, also more than economists had projected.
Stocks rallied anyway as investors had braced for the worst, experts said. And they hoped that oil would keep falling and lighten inflation later in the year.
That provides little help for consumers who already are struggling with higher costs.
Gas prices rose 10.1% in June while food and beverage costs were up 0.7%.
And inflation-adjusted average weekly earnings of American workers dropped 0.9% last month, meaning people are grappling with both higher prices and lower wages.
On Capitol Hill for a second day, Federal Reserve Chairman Ben S. Bernanke said the central bank was doing its best to prevent high energy costs from triggering inflation across the economy, but has to balance the countervailing need to keep the economy growing.
"Monetary policy works with a lag," Bernanke said. "We can't look out the window and do something that will affect the economy today. And so the best we can do is try to make forecasts and try to adjust our policy in a way that brings the forecast toward the desired outcome."
Bernanke said he could not say whether the economy is currently in a recession, but said the technicalities are less important than the hardships of ordinary Americans.
"I think I would not put much weight on this technical terminology. I mean, I think it's clear that growth has been slow, that the labor market is weak. And so conditions are tough on average families," Bernanke said. "I have no doubt that, whether it's technically a recession or not, I don't see why that makes a great deal of difference."
Several members railed about the drain higher energy prices are taking on family incomes.
"Let me just assure you that this economy is deeply in a recession, certainly, and in many parts of our country they're hovering around the elements of a depression," said Rep. David Scott (D-Ga.) "Many American families are just basically hanging on by their fingernails."
Bernanke urged members to take swift action to shore up the housing market, which he said repeatedly is the cause of the country's financial and economic woes. But he said it was probably "premature" to talk about a second round of economic stimulus rebates for taxpayers.
As markets resume trading today, investors will be paying close attention to second-quarter earnings from Merrill Lynch. It is expected to incur a big loss and book a large write-off, and Citigroup is expected to do the same on Friday.
Investors will be focused largely on the companies' financial projections, said Weedon's Goldman. They are willing to give the stocks "a little bit of tolerance" as long as the companies don't forecast unexpected problems ahead, he said.
The drop in crude was sparked by an unexpected rise in inventories. That pushed down crude oil prices by $4.14 a barrel, to $134.60. Oil has fallen more than $10, or 7%, in two days and is at its lowest level since late last month.
That propelled the Dow back above 11,000, as it gained 276.74 points, or 2.5%, to 11,239.28.